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Rash with cash or stashed with cash?

Money is like manure. You have to spread it around or it smells—J Paul Getty

Under normal circumstance a majority of well-run companies follow the advice of going cash-light to perfection and invest their surplus to optimise the yield and liquidity. But sometimes a few of them go overboard with investing reserves on books and forget to maintain sufficient cash to tide over emergencies. And worse, a few companies not only run short of cash but they get trapped in illiquid investments.

And that’s why …the whole thing is that ke bhaiya sabse bada rupaiya

The markets retraced 50% of their fall in April but the problems of real economy— difficulties in day to day business dealings—are far from over. Once the lockdowns end and life returns to normal, businesses are likely to deal with lackluster demand, delay in receivables and constant pressure from creditors.

Under such circumstances, highly leveraged companies from beaten down sectors are likely to suffer the most. Corporations have started announcing their Q4FY20 results but the full-impact of the coronavirus pandemic might only be visible in Q1FY20 results.

According to media reports based on early trends indicated by Q4 results of some private banks, the banking sector might witness a 50bps to 80bps rise in NPAs on account of the nationwide lockdown. RBI’s financial stability report released in December 2019 estimated that the Gross NPA ratio of India’s commercial banks might rise to 9.9% in September 2020 from 9.3% in September 2019. If you take this as the base case and add to it an 80bps rise on account of the coronavirus inflicted lockdown, then India’s banking system might see the gross NPA rising to at least 10.7%.

The coronavirus pandemic has been a lesson to corporations that it’s not unreal to assume that one won’t be able to earn even a single rupee of revenue for two months and a majority of business debtors would find it difficult to pay on time.

Therefore, it’s said that unprecedented crisis test the managerial skills of business leaders.

Businesses that don’t have sufficient cash as compared to their short term obligations (obligations due in the next 1 year) are likely to suffer for the next 4-5 quarters. In the meanwhile, they not only are likely to miss the opportunities to ramp up their business operations but many of them may even miss growth-through-acquisition opportunities.

Our research team scanned 416 non-financial stocks of NSE-500. They were analysed on two parameters—debt-to-equity ratio and short term obligations to cash and cash equivalent ratio. While the former indicates the company’s indebtedness, the latter suggests how many times the company’s short-term obligations are as compared to cash and equivalent assets? For example, the ratio of 0.5 indicates that the company’s short term obligations are half its cash and equivalent assets. In other words, the lower the ratio, the better the liquidity position of the company and vice-a-versa.

You would be surprised to know that only 75 stocks (out of 416) had short term obligations to cash and equivalent ratio of less than 1. We also considered credit ratings of the companies for our analysis.

It’s noteworthy that 287 companies have a short term obligation to cash and equivalent ratio of greater than 2.0.

Below is the list of 20 companies which are either completely debt-free or have a very negligible debt, a short-term obligations to cash and equivalent ratio of less than 1 and enjoy the topmost or a notch below credit rating.

Also watch out for…

The growth parameters, quality of management and return ratios, which are extremely crucial for selecting the right stocks for your portfolio —–considered here. The intent is only to highlight low-debt companies that are well-prepared to handle possible receivables and payables mismatches in the Post-Corona era. Under no circumstances, should it be construed as a recommendation to buy any of these stocks.

In a nutshell…

When markets are firing on all cylinders and bulls are in charge, investors tend to overlook conservative companies. But more often than not, consistent companies revolve around their established growth path without getting perturbed by the boom or gloom environment. Such companies suddenly enjoy the limelight when bears expose investors to the harsh realities of business.

Editor’s note

You might recall how in March markets went down like some heavy object falling under the force of gravity and in April, floated like there’s no gravity. Are you getting a feeling that you missed the bus?

You see, avoiding noise and spotting the right trend is crucial for successful investors. In case you aren’t sure which stocks to buy in the corona affected world, look nowhere else. Our recently publish research report is just for you! Read here

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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Ventura Securities Ltd. is a well diversified financial services firm offering Retail and Institutional Broking in Equities, Mutual Funds Distribution, Commodities Broking. Ventura operates in a network spread over numerous cities and locations in association with its business partners